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Botswana plans on depreciating its currency to combat inflation

Botswana’s Ministry of Finance recently announced that they plan to weaken the Pula (BWP) by 1.51% against a basket of other currencies throughout 2024. This policy, known as a “crawling peg” aims to address the anticipated higher inflation within Botswana compared to its trading partners.

The primary reason for this move is to counter Botswana's expected higher inflation in 2024. By making the pula cheaper relative to other currencies, imported goods become more expensive, which can help to dampen domestic price pressures. While Botswana currently has inflation within its central bank’s target range (3-6%), several factors suggest it might be higher than its trading partners.

External and internal factors are expected to contribute to the rise of inflation. Botswana is not exempted from external factors. While oil prices have receded recently, they remain volatile and could rise again, impacting Botswana's import costs for fuel and related products. Similar to energy, international food prices remain elevated due to ongoing supply chain disruptions and the war in Ukraine. This could translate to higher costs for imported food items in Botswana. It is important to emphasize that the Botswana pula is heavily pegged to the rand, which means its value also fluctuates along with the rand. If the rand weakens significantly, it could drag down the pula and contribute to imported inflation in Botswana.

Regarding internal factors, Botswana's economy heavily relies on diamond mining, but other sectors haven't seen significant growth. This limited domestic production makes the country more reliant on imports, further exposing it to external price pressures. And more importantly, if the government decides to boost its spending to address social or economic issues, it could inject additional money into the economy, potentially creating excess demand and pushing up prices.

The depreciation will occur through small, daily adjustments to the pula's exchange rate, totaling 1.51% by the end of the year. This approach aims to minimize volatility and maintain predictability in the foreign exchange market. According to central bankers, the crawling peg presents several advantages to minimize volatility. One of the first major advantages is predictability. Gradual adjustments provide greater predictability for businesses and investors compared to a sudden devaluation. Moreover, it is anticipated that a weaker pula will make Botswana's exports cheaper on the international market, potentially boosting export growth. And lastly, the central bankers argue that by mitigating imported inflation, the crawling peg can help the Bank of Botswana maintain its inflation target.

Currency depreciation could have both positive and negative consequences. On the one hand, it could boost exports by making them cheaper for foreign buyers. However, it could also lead to higher prices for imported goods, impacting consumers and businesses that rely on them.


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